Trade credit insurance: The different types and how to manage risk

Trade credit insurance protects exporters of all shapes and sizes.

 

Here on the Coface blog, we’ve focused a lot on the importance of trade credit insurance (TCI) to Australian businesses, and how the right policy can provide a financial safety net in the event of a customer not paying what they owe. While it’s hugely important to understand TCI as a whole, it’s also critical for businesses to know what goes into selecting the right type of policy, as well as some of the other ways that trading risks can be managed and reduced.

That’s where Coface can help. With a variety of different types of trade credit insurance, our team is able to recommend the very best policy for a particular business. If there’s not already a clear solution within our existing products and services, we can also create bespoke, one-off solutions that ensure every base is covered.

There are several factors that should be considered before selecting a TCI policy.

Choosing the right type of trade credit insurance

When selecting a TCI policy, businesses should start by identifying a provider with the track record, expertise and international reach necessary to meet their needs. This is particularly true within the Asia-Pacific region (APAC), where differences in language and culture can make even the smoothest of trade dealings a stressful process.

Here at Coface, we pride ourselves on having the skills and contacts needed to succeed in the APAC region, with over 20 years of experience working within the area. In addition, we have offices in 13 different APAC markets, including:

  • Australia
  • China
  • Hong Kong
  • India
  • Indonesia
  • Japan
  • Korea
  • Malaysia
  • Philippines
  • Singapore
  • Taiwan
  • Thailand
  • Vietnam.

This experience and scope makes us the perfect team for Australian businesses looking to tap into everything the Asia-Pacific region has to offer.

What to consider with a TCI policy

Once you’ve identified the right TCI provider for your company, there are several factors that should be considered before selecting a trade credit insurance policy. These all relate back to the overall level of risk faced by businesses, including where they operate and on what scale. For example, the financial risk held by a multinational supplier of IT services with millions in annual turnover is likely to be very different to a small Australian business exporting a few thousand dollars worth of agricultural product.

Some of the most important elements to consider are:

  • Annual turnover: The higher a business’s annual turnover, the more comprehensive a TCI policy needs to be, in order to cover for potentially large sums going unpaid. Despite this, it’s perhaps more important for SMEs to have some form of trade credit insurance, as their cash flows are more likely to be interrupted by unpaid accounts receivable.
  • Trade partners: While all forms of international trade carry some form of risk for Australian businesses, there is more danger associated with exporting to certain parts of the world. For example, political instability is far more likely to affect a country in the Middle East or Africa than somewhere like Japan or New Zealand.
  • Business operations: Many businesses seeking TCI will be exporting goods, but if a company’s operations are slightly more complex, such as services that involve labour costs rather than just product, a TCI policy (and the set trade credit terms) should reflect that.

Most of these categories relate back to the size and scope of a business’s trade dealings, which is why Coface breaks down its most common forms of TCI into three distinct categories. These are:

  • EasyLiner: For SMEs with an annual turnover between AU$750,000 and $5 million.
  • TradeLiner: For businesses with diverse international interests and an annual turnover of over AU$7 million.
  • Coface Global Solutions (CGS): For multinationals with multiple large clients across the world countries and very high annual turnovers.

Coface is able to provide a Single Risk solution that protects against the specific risks faced by an ad hoc project.

Set TCI policies are a great starting point, but there are often situations where a more tailored form of trade credit insurance is required. Examples of these include large one-off transactions and dealings with businesses in particularly unstable circumstances. In these cases, Coface is able to provide a Single Risk solution that protects against the specific risks faced by an ad hoc project. These policies can be customised to account for a wide variety of different circumstances, including everything from political instability to dealings within a higher risk industry.

The flexibility provided by a Single Risk TCI solution allows businesses to enjoy complete, fully scalable cover for their international trade dealings, reducing risk and preventing any disruptions to cash flow caused by a lack of payment.

Minimising risk beyond trade credit insurance

While TCI is a firm line of defence against non-payment, it’s not the only way businesses can protect themselves when trading internationally. It’s arguably just as important to go into any deal with an overseas buyer having a firm understanding of not only their credit history, but also any other factors that may affect trade credit terms and repayments.

While TCI is a firm line of defence against non-payment, it’s not the only way businesses can protect themselves when trading internationally.

A great example of this are political and geographic risks, such as the possibility of war breaking out or a natural disaster occurring. These sorts of events are outside of any trading partner’s control, but may still affect their ability to pay off any debts. Accordingly, Australian businesses should ensure they have as much information as possible on any external factors, in order to avoid potentially risky trade partnerships.

Regardless of the various risks associated with any sort of trade partner, the Coface team is able to provide insights into whether or not Australian businesses should commit to a deal or look elsewhere. This information, in combination with the right trade credit insurance policy, is the very best way for exporters to protect themselves and ensure their overseas operations are both profitable and stable.

To find out more, contact Coface today.